Expenses Expressly Allowed

While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assesses are required to pay taxes on such expenditures by adding it back to the net profits. There are two primary reasons for disallowance of any expenditure:

• The tax amount required to be deducted on certain expenditures are not deducted while making the payment.
• The expenditure does not implicitly relate to the conduct of such business or profession;

Any expenditure which is disallowed attracts the tax at 30% rate (25% in case of certain companies) but alongside, interest, penalty, and prosecution provisions are also triggered.

Expenditures disallowed for TDS default

The Income Tax Act states certain circumstances where if the TDS deductible on payments has not been deducted appropriately, such expenses are expressly disallowed.

The various provisions which relate to disallowance on account of TDS default are as follows:

• Payment (for other than salaries) outside India or to a non-resident or foreign company (for example payments for interest, royalty, technical fee, etc.)

The repercussions under various scenarios of TDS default are given below:

If any amount is paid as salaries to a person outside India or a non-resident without deduction of TDS, the amount so paid is disallowed as expenditure.

• Payment of any sum to a resident with TDS default (including salaries)
• The repercussions under various scenarios of TDS default are given below:

Certain case laws in this respect have pointed out some interpretations and applicability of provisions as follows:

• CIT vs Chandabhoy and Jassobhoy: Short deduction of TDS is not a reason for disallowance if there is a shortfall on account of the difference in opinion.
• S.B. Developers and Builders vs ITO: The income increased due to disallowance under this provision is eligible for deduction under 80IB (if the business is applicable for deduction u/s 80IB i.e. profits and gains from certain industrial undertakings)
• HCC Pati Joint Venture vs CIT: Excess payment of tax in the previous year or a tax refund pending from previous years can’t be a reason for non-deduction of TDS. The applicable TDS will still be required to be deducted.

The act also provides for a relief in case of non-deduction of TDS if the below-mentioned clauses are fulfilled.

In a case where TDS is required to be deducted and the same has not been deducted, the assessee can claim a relief and the expenditures will be allowed if:

• The recipient has filed his return of income in time;
• The above payment has been taken into account by the recipient while filing his/her return;
• The recipient has paid taxes appropriately on the declared income;
• A certificate from a Chartered Accountant is obtained and uploaded with the return to this effect.

Expenditures disallowed for payment in cash

There are certain transactions where the payment for the services or goods are made by the assesses in cash instead of cheque or bank transfer, etc. In all such cases where the amount of payment exceeds Rs. 20,000, the expenditure is disallowed. The act provides for such payments to be made through an account payee cheque, account payee bank draft or bank transfer and likewise.

Although the section provides for disallowance in case of payments for expenditure in cash beyond Rs. 20,000, there are certain instances where the payment exceeding Rs. 20,000 is allowed in cash and the allowance for such expenditures are given as well. Such list of expenditures is prescribed in Rule 6DD.

An illustrative list is given here as follows:

• Payment to banks, financial institutions, etc.
• Payment to government
• Payment made by book adjustments
• Payment for purchase of agricultural products
• Payment made to cottage industries which are producing without the aid of power
• Payment to a person in a village which is not served by any banks
• Payment of employment terminal benefits (Up to Rs. 50,000)
• Payment of salary after deducting TDS appropriately
• Payment made on a day on which banks are closed
• Payment made by forex dealer

The provision applies in the case where the payment is made to a single person in a single day.

Recently, the income tax department has notified that the limit of all expenses made in cash on a particular day has been reduced to Rs 10,000. The rules provides for such payments made through an account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as prescribed under rule 6ABBA and will have effect from the 1st of September 2019.

Here is the list of other electronic modes specified in Rule 6BBA:

1. Credit/debit card
   2. Net banking
   3. IMPS
   4. UPI
   5. RTGS
   6. NEFT
   7. BHIM Aadhaar pay